US GDP grows just 1.7% in Q2

Economic growth

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US GDP Aug13“The big picture remains unchanged. Four years after the recession officially ended, per capita output and income have yet to return to their pre-crisis highs. The recovery still ranks as the worst since World War II. And despite the modest acceleration in the past two quarters, the recovery shows little sign of gaining momentum.”

The above isn’t a blog forecast about the likely economic impact of the West’s transition to the New Normal.  It is instead the conclusion of Thursday’s main story in the Wall Street Journal, reporting that Q2 GDP grew just 1.7%. The Journal also warned:

“There are some signs the overall economy’s acceleration could be short-lived. More than 24% of the quarter’s growth came from an increase in inventories—a buildup that is unlikely to be repeated and could even be erased in subsequent data revisions. Consumer spending, which has been the backbone of the recovery recently, grew at a slower pace in the second quarter, with Americans cutting spending on hotels and restaurants—a possible indication families are pulling back on discretionary items. It is also possible federal-government agencies may make more cuts in coming quarters.”

This is yet further confirmation of the way that the blog’s views on the economic outlook are now becoming mainstream consensus thinking.  The pity is that the demographic rationale for these developments is still not being properly discussed.  Policymakers seem most unwilling to accept there can be no return to the SuperCycle period of constant growth. As a result, companies and the media continue to be given the wrong outlook.

The chart above shows the most likely outlook for GDP growth and interest rates.  It focuses on the average 5 year percentage growth in the critical Wealth Creator generation of 25 – 54 year-olds (blue column) as the key dimension.  When this cohort is growing fast, then interest rates (black line) and GDP (red) also increase quickly.  When growth is the cohort slows, then growth and interest rates also slow.

The reason is obvious.  A sustained surge in the number of Wealth Creators (as happened from 1971 as a result of the 1946-64 US BabyBoom) means that demand starts to increase faster than supply.  So interest rates need to rise, to allow the price mechanism to ration available supply.  Then once growth in the number of Wealth Creators starts to slow, supply begins to catch up with demand, and so interest rates can fall back to normal levels.

If President Obama decided to add the blog to the shortlist to become the next Federal Reserve Chairman, this is the one chart it would take to the interview.  Unlike most economic models, it has been accurate for the past 50 years.  And its ability to continue to forecast the outlook depends only on knowing how many people will be entering or leaving the 25 – 54 age group – something which is very well understood.

Latest benchmark price movements since the IeC Downturn Monitor launch on 29 April 2011, with ICIS pricing comments below:

Naphtha Europe, down 20%. “Petrochemical demand for naphtha is higher than a couple of weeks ago.”
PTA China, down 17%. “Chinese domestic PTA prices were relatively softer than import prices because of abundant supply and weak spot requirements from end-users”
HDPE USA export, down 15%. “Global demand is weak, with buyers purchasing only as needed”
Brent crude oil, down 13%.
Benzene Europe, down 3%. ”Prices in July reached a yearly low on ample availability and weak derivative offtake
US$: yen, up 21%
S&P 500 stock market index,  up 25%

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